New tax reform to draw Indian businesses into digital economy

Government hopes there will be a jump of 14 percent in revenue growth under the new levy as more taxpayers come into the fold of the formal economy and move on to digital modes of payment.Bloomberg | May 23, 2017, 09:03 IST

India’s biggest tax reform in history is also set to make its small-to-medium businesses more transparent.

On July 1, as India rolls out its landmark national sales tax, businesses that make less than 100 million rupees -- which the government refers to as micro, small and medium enterprises -- will all have to digitise.

The firms, often accused of conducting business mostly in cash and evading taxes by under-reporting income, will for the first time have to report every transaction, creating an online trail for the tax office.

Currently, many of the transactions by an estimated 51 million small enterprises are carried out in cash, with no trail of sales. This makes it easier for some to under-report revenue.

The federal government hopes there will be a jump of 14 percent in revenue growth under the new levy as more taxpayers come into the fold of the formal economy and move on to digital modes of payment. It will bring an unprecedented transparency and create data for almost every monetary transaction in the economy, the government hopes, and this, in turn, will help expand the tax base.

"The incentive for cash transactions would reduce -- now they will be able to take credit for the taxes paid," said partner and indirect tax head, PwC India, Pratik Jain. "Also evading tax will be difficult as transactions have to be reported on GSTN portal. So the level of compliance should increase."

UnderreportingBut the new reporting requirements could also mean chaos in a nation where about one-fourth the population can’t read or write and many offices do not have the technology needed to file digital returns.

"The transition is going to be very painful," the country director at the International Growth Centre and India’s former chief statistician, Pronab Sen, said in New Delhi over the telephone. “It will take at least two-to-three years for them to settle."

With just 38 days to go for the roll out, the micro, the small and medium sector that contributes over 30 percent to the nation’s GDP and 45 percent to exports is struggling to adopt the new regime. They’re bracing for a painful rejig where the change over to digital book keeping will also mean investing more money in equipment and tax consultants.

Several businessmen interviewed by Bloomberg News expressed concern over the new tax regime and said many would be forced to submit fake invoices if those they traded with did not upgrade their operations to report sales and purchases.

This would run counter to the government’s stated aim of reducing black money or unaccounted cash in the Indian economy. Prime Minister Narendra Modi’s push to implement the new tax, which will unify India’s 29 states into a single market, comes within months of his shock cash ban last November. The withdrawal of 86 percent of India’s currency in circulation paralysed small businesses, farmers, workers and shopkeepers who traditionally transacted in cash.

No connectivitySmall and medium businesses employ over 111 million Indians. The government estimates 39.44 million or 87 percent of these are owned as private outlets with most concentrated in India’s eastern state of West Bengal and the northern state of Uttar Pradesh.

"Digital payment has disturbed the sector," Prakash Chand Jain, chairman of New Delhi-based Bawana Chamber of Industries said. “Small units don’t have highly educated owners, chartered accountants or even internet. The rural economy doesn’t have the culture of bills. How will this whole paraphernalia come into place? There is no connectivity. The government hasn’t even educated us".

The threshold for exemption, designed to protect small units, was earlier pegged at 15 million rupees. It has now been slashed to 2 million rupees.

"Now they will have to compete with these big companies," Rajiv Agarwal, senior vice president, Industrial Association of Uttarakhand, said over the phone. "In the first six months, there will be a huge negative impact and some slowdown."

However, he predicts small units will witness significant growth should they choose to put their house in order. "They will have access to the seamless market," he said. "The self-imposed restriction on their growth to escape the tax authorities and hassles involved will go away with one tax system."

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